It seems hardly a week goes by without word of a new campaign to rein in hedge funds. Among them is a proposal to close the carried-interest exemption on funds, a move that has sent tremors through the industry. Riding to the rescue, maybe: the New York–based American Civics Exchange. Its owners say it aims to offer a way to hedge such risk.
The exchange — which is being promoted as the first U.S.-based marketplace for political futures — will trade derivatives contracts written around policy issues that affect business. For instance, says Brett Joshpe, the exchange’s general counsel: “The Employee Free Choice Act, which would allow unions the right to organize without secret ballots, would have a tremendous bottom-line exposure to a company like Wal-Mart.” Other topics of import that have the potential for being hedged on the exchange — which operates from an online platform at www.amciv.com — include emissions cap-and-trade legislation and changes in the minimum wage law.
“This is something for institutional investors with a lot of money at stake on a particular political outcome,” Joshpe says.
The exchange isn’t expected to open until late May or June, but here’s an example of how a contract would work, according to the Web site. An investor who wanted to hedge against a $100,000 exposure to a proposed increase in capital gains tax rates could buy ten $10,000 contracts today that settle on December 31, 2010. The bid-ask price of each contract is $2,900 to $3,000, so the investor could expect to pay about $30,000 for the contracts. If the legislation is enacted on or before the expiration date, the investor would be paid $100,000. If it’s not, however, this is an expensive hedge — at least in this example. The buyer is out $30,000.
The company’s Web site goes to considerable lengths to state that the exchange is not a gambling enterprise: “Much like established futures markets for commodities, interest rates, foreign exchange and weather, the [American Civics] Exchange offers a valuable risk-management solution to market participants.”
Other sites that offer trading in political futures or current events include Dublin-based InTrade, which provides a chance to bet on less-serious matters — like who will win American Idol.
